Educational Articles

Coverage Initiation: Chicago Bridge & Iron

James Jan Sullivan
| January 17, 2011

Chicago Bridge & Iron (CBI) recently returned to the pages of The Value Line Investment Survey. The company is domiciled in the Netherlands and provides engineering, procurement, construction, and technology licensing services, principally to the energy industry. CBI operates at all phases of the hydrocarbon industry: extraction, processing, midstream, and transportation. It also sells to the wastewater treatment, mining, and nuclear industries.

Chicago Bridge & Iron was formed in Chicago, Illinois in 1889, as a bridge design and construction firm. The company was first listed on the New York Stock Exchange in 1977. CB&I merged with industrial gases manufacturer Praxair, Inc. in 1996. The next year, Praxair spun off the “new” Chicago Bridge & Iron. The company has traded on the New York Stock Exchange since then.

For years, CB&I focused on the hydrocarbon storage portion of the energy industry. Since the early 2000s, the company has grown rapidly through a number of mergers and acquisitions and now serves virtually every part of the energy industry. To rationalize its businesses, it operates in three segments. The first, CB&I Lummus, consists of the company’s heavy construction (EPC) business. This unit builds petrochemical facilities, liquefied natural gas terminals, refineries, floating production and storage vessels, and other projects. The second, Steel Plate Structures, specializes in designing and building storage tanks, containment vessels, and supporting facilities for the hydrocarbon, wastewater treatment, and nuclear industries. Finally, Lummus Technology runs a process and technology licensing business. The unit owns more than 1,500 patents and patent applications. The technologies apply largely to the refining, gas processing, and petrochemical sectors.

CB&I’s legacy Steel Plate business is a leader in the industrial storage market. The company has more than 75 years of experience in engineering these kinds of facilities and thus manages the risk of executing fixed-price contracts in this area very well. This unit should continue to provide consist cash flow in the future.

The CB&I Lummus unit has a little less experience competing for the very large refinery, liquefied natural gas terminal, hydrocarbon production, and petrochemical awards that it has been working on recently. The unit generates narrower margins and we have less confidence in its ability to avoid the cost overruns that can put profits in jeopardy. That said, the unit has won a number of large projects recently, including a $1.4 billion refinery in Colombia and a $1 billion gas plant in Papua New Guinea. We wait to see how well the company executes these projects; if it has some success, we believe CB&I can catapult itself into the top rank of global engineering, procurement, and construction companies.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.